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FOMC Meeting - Fed to Buy Over $1 Trillion in Securities


Now that the Fed can't cut interest rates any more, it's now trying to stimulate the economy by purchasing over $1 trillion of mortgage-backed securities and longer-term Treasury securities. From the Fed's press release:
To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities
Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

And for interest rates, there continues to be no sign of change:
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

As reported by this CNN article, 10-year and 30-year Treasury yields fell sharply after the news. These are not good signs for bank deposit rates.

The only good news for savers is that inflation continues to be low (as measured by the government). February CPI numbers were released today, and they show only minimal inflation. BestCashCow has a good review of the inflation numbers and their impact on real returns on savings and deposit accounts.

With Bernanke admitting to printing money, the question is when will inflation come roaring back. Once this happens, we'll see higher interest rates as the Fed tries to keep inflation in check. This is something to consider when deciding on longer maturity CDs.

Update: Inflation may not be around the corner. This post by Mish of Global Economic Trend Analysis makes the case that inflation won't be coming back any time soon.

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Anonymous   |     |   Comment #1
Of course, Bernanke has commented that the Fed will take action to curb inflation once it appears, but when has the Fed ever stayed ahead of the game?

Those who have complained about the current low savings rates in the near absence of inflation are very foolish. At least we're keeping up with inflation now. Once inflation starts accelerating, we'll never keep up with it. It's a scary scenario.
Bozo   |     |   Comment #2
To: All
Re: Look at the bright side

Bond traders are not the Fed.

I'm not a big TIPS fan, but posters over at Bogleheads are noting a huge move today. I don't look at prices of TIPS on the secondary, but I suspect you can do much better in any Alliant CD than you could in a TIP bond of equal duration, i.e., a 5 year with one year to go compared to an Alliant one-year CD.

I think we're more than just keeping up with inflation with our CDs.

Ladder, ladder, ladder. Two years is prolly the "sweet spot" for CDs maturing about now.

Just my $.02.

Regards to all,

Anonymous   |     |   Comment #3
To the anonymous poster of 3:27 PM.

Interest rates ARE being held artificially too low. Whether there is inflation or not depends on what your primary purchases are.
The Feds have fed us phony numbers for years by excluding the basic neccessities such as food and energy, along with creative figuring used in their inflation calculations.
Anonymous   |     |   Comment #4
The Europeans are so not buying into this crap. They are wisely awaiting the impact of the existing stimulus measures, yet to be felt or seen.

Bernanke is acting like an impatient, young, spoiled child: He wants his economic recovery and he wants it NOW!!! He wants the USA to return to its asinine free borrowing, free spending, minimum saving, anything goes ways. And this will not happen too soon to satisfy him. Bernanke is a fool in process of destroying America. The Obama administration is worse. They are all ivy league trained liberal jackasses. And they all need to be "took out behind the barn and shot"!
Anonymous   |     |   Comment #5
It will be interesting to see what will be the I-bond rate when it is announced for May. It looks like with low inflation, that you might get something similar to a rate like those big bank checking accounts go for at 0.05%. CD rates are approaching the regular savings accounts rate, so the downside risk is small, but the upside risk is big. I might look to park some of my money in a high rated insured muni and get at least 5% for 10 years tax free. Even if CD rates shoot up later to as high as 10%, my after tax yield will still be comparable.
Anonymous   |     |   Comment #6
All I bonds will earn 0.00% on their next reset beginning on May 1st.

It will be interesting to see what rate the treasury assigns the fix rate on new bonds.

However, even saying that I bonds are not that bad of a deal. They are currently earning 5.84%. If you figure in, the next six months at 0.00%, that still is 2.92% for the year. Plus, they are state and local income tax free.
Anonygal   |     |   Comment #7
Does ANYONE in Washington give a penny about the ELDERLY who depend on decent interest rates so they can afford to purchase products? It seems it is more important to Bernanke and Obama to get low interest rates to more people can buy stuff they can't afford!

BTW, what is an I Bond and where can one buy them? Are they insured? Thanks!
Anonymous   |     |   Comment #8
Talking about inflation, Bozo, you need to lower the interest rate on your ego. Your two cents is hardly worth the electrons used to display it.

If I had a million dollars, I'd have to find five Alliant CUs to safely put it in. Or, I could just buy some TIPs, which are also far more liquid.

Furthurmore, last I checked, Alliant doesn't do brokered deposits. So, few with a retirement account are going to be putting their money there. But they can easily buy TIPs and TIPs funds.

You don't need to shill for Alliant. They do well for themselves.
Anonymous   |     |   Comment #9
What are I bonds?

A United States Savings bond available at most banks. It is backed by the US Government, thus it is very safe.

It has a fixed rate plus the rate of inflation.
Anonymous   |     |   Comment #10
To the guy who Bashed Bernanke...I respect Bernanke because he has studied the previous resession and is trying something NEW to counteract itand end it. Both he and the president are ACTING instead of sitting on their thumbs. Maybe you should go live in Europe?

Banking Guy
Banking Guy   |     |   Comment #11
Regarding I Bonds, I'm working on a new I Bond post. There could potentially be a good long-term deal for I Bonds starting in May. However, I Bonds are now limited to a maximum purchase of $10,000 per SSN, per year which limits the value of the deal.
Anonymous   |     |   Comment #12
http://online.wsj.com/article/SB123749350368087807.html (“What the Fed's Bond Buy Means for You”)
Anonymous   |     |   Comment #13
Reply to 5:07 AM, March 19, 2009

Regarding the earlier comment that I-bonds may earn 0% starting this May and would still be "not that bad of a deal". How is earning 0% during ANY time period a "good deal"? Even though inflation is near zero percent, how is earning NOTHING considered a "good deal"? For example, say you decided to invest a large sum of money into the I-bonds with a 0% base rate and all of your interest is completely based on the inflation component. If inflation stays flat for many years, then you will earn 0% for that same number of years. Let's say we are in a depression period that spans 15 years, then for 15 years, my I-bonds earn NOTHING. Well, during that time I still have to pay the utility bills, buy food, gas, clothing, pay taxes, pay medical bills, etc. While it was certainly nice to earn 5.84%, that lasted ONLY six months. I am sure the Treasury is going to have to offer some kind of base rate above 0% if the inflation component stays around zero percent for new bond offers. If inflation remains very low for a long persistent period, then the EE series bonds will be the "better deal".
Anonymous   |     |   Comment #14
One additional comment. The I-bond would be considered a "good deal" when compared to most stock market investments over the past year. Since you lost, on average, around 30% in stocks last year and it is not doing well so far this year as well, then on that basis, the I-bond is a good deal. That is why so many investors have moved their money out of the market to Treasury securities.